Major Airlines Fly Back From The Brink

After Three Years Of Steep Losses, The Nation's Major Carriers Could Break Even In 2004, Analysts Said.

January 4, 2004|By Melissa Allison, Chicago Tribune

U.S. airlines are in better shape than they were a year ago, with 2004 expected to bring even more passengers and better financial results.

The past year saw 2 percent more people climb aboard U.S. carriers despite fears surrounding the war in Iraq and the SARS virus.

Airlines saw a 3 percent uptick in revenue passenger miles, a common measure of air traffic, during the 12 months ended September 2003, according to the Federal Aviation Administration.

Last year also saw a turnaround at United Airlines, which many expected to be scrapped by now. Current plans call for its emergence from bankruptcy in the middle of this year.

But the industry remains in delicate condition.

Many airlines are crawling back far more slowly than they fell in 2001, when the effects of a faltering economy were compounded by terrorist attacks that scared away passengers and put a further crimp in corporate travel budgets.

Despite a 2 percent rise in passengers aboard domestic flights in 2003, domestic air travel is down 8.5 percent from 2000, according to the FAA.

The industry's financial situation is similar.

The FAA expects large U.S. airlines -- those operating planes with 72 or more seats -- to post operating losses totaling $5.4 billion in fiscal 2003, an improvement from the past two years.

Barring catastrophes, the industry could break even in 2004, experts say.

"Some of the big ones will be profitable this coming year," said Robert Bowles, the FAA's manager of statistics and forecasts.

If they continue to cut costs in a way that makes them more competitive with low-cost carriers, he said, "most could be profitable by 2005."

Bowles echoes the warnings of experts throughout the industry, who have watched low-cost carriers such as Southwest Airlines win business away from legacy airlines such as United and American Airlines.

Much of the battle between the mainline and low-cost carriers is over business travelers.

The large carriers, once thought invincible when it came to the corporate passenger market, have lost business to low-cost, no-frills airlines because of shrinking travel budgets.

A survey by the National Business Travel Association found that the use of low-cost carriers hit a record high last year, with more than 80 percent of its members using economy carriers more frequently in 2003 than they had before.

"Business travelers tried flying on low-cost carriers and found the service is not that bad," said Bowles, who predicted that business travelers will never again pay $1,000 more for their ticket than coach passengers.

This year will help determine how the largest carriers, now more financially stable than a year ago, will be judged by corporate fliers.

Many major airlines are trying to make themselves more attractive to business travelers.

United last year attracted enough passengers from a reduction in business fares to increase revenue by $20 million to $25 million a month.

Deutsche Lufthansa upgraded its business class to include sleeper seats on several planes last fall.

Although amenities can be important in keeping business and first-class passengers, a bigger key to success for the largest airlines is expense reduction.

"There are still severe financial pressures, and in some cases they are in financially precarious positions," said Bob Toomey, an aerospace analyst at RBC Dain Rauscher.

William Warlick, an airline analyst at FitchRatings, agrees.

"The recovery of the six major network airlines -- American, Continental, Delta, Northwest, US Airways and United -- will be slow and arduous, and it remains to be seen whether these airlines can reduce expenses enough to be profitable in the long run," Warlick wrote in a recent research report.

However the market shakes out between mainline and low-cost carriers, the overall industry is expected to recover during the next few years.

The FAA predicts that in 2014, 822 million people will fly on U.S. carriers and revenue passenger miles will be up 54 percent from 2003.